the intersection of sports, economics, management, and strategy

The Olympics are again broken, cursed by economic fallacies relating to crowding out, shortsightedness, and the winner’s curse. Yet given the global demand for Olympic viewing, a new kind of corporate politics may provide the answer, albeit an unpopular one.

The growing revelation that bringing the Olympic torch to town ignites skyrocketing public costs in exchange for a two-week circus is not new. The 1984 Games of the XXIII Olympiad—the most financially successful Olympics ever—went to Los Angeles because literally no one else wanted them. Tehran, the only other city in the world to even bid for those games, withdrew from consideration.

How could such lackluster interest produce the most successful Olympics ever? Precisely because the city appreciated the economics of public finance, had substantial existing facilities, and did not fudge the numbers in order to win the bid.

Generally, crowding out refers to the propensity for government spending—particularly tax dollars and loans—to replace, rather than supplement, private spending. A government collects $1 and puts on the Olympics, returning $2 in revenue. Terrific! Except that $1 is no longer available to the private sector, where it may have returned $3 or even $4. Study after economic study suggests that the Olympics induce crowding out. In 1984, however, Los Angeles privately funded the games. By now the six words seem as natural as the five rings, but Los Angeles only introduced them 31 years ago: “Official sponsor of the Olympic Games”.

Additionally, Los Angeles refrained from building even one new facility to host. The monstrous, newfangled venues of today are magnificent for two weeks (if they are finished), then rendered useless tracts of concrete. NFL stadiums are used a minimum of 10 times a year, for decades, and those built since 2004 have cost about $900 million each in 2014 US Dollars. Yet recentOlympicStadiums have cost roughly $500 million, despite being doomed to hit full capacity a scant 16 times, if that. By modestly upgrading existing facilities, Los Angeles organizers did not overreach, nor overvalue the present.

Lastly, consider the winner’s curse, the economic idea that the winner in an auction likely overpays, being by definition willing to pay more than any other bidder. Seoul, Barcelona, Atlanta, Sydney, Athens, Beijing, etc…did these cities truly stand to gain more from hosting the Olympics than those they outbid? Economist Evan Osborne notes: “When multiple cities bid, each has a different view of what the revenues will be, and the one with the brightest economic forecast usually wins.” When the torch leaves and the foolish forecast fails, cities are left footing the bill. Los Angeles’ relatively unenthusiastic acceptance of the 1984 games put the city in position to embrace the economic realities from Day 1—and chase corporate dollars accordingly—rather than delude themselves with fictional returns and false hopes for the best.

Los Angeles was different. And so must the next host city be to succeed. The next games must disrupt the status quo. This may mean pushing to larger, established cities with infrastructure in place. This may mean hunting for more sponsors and offering more advertising. Perhaps that seems against the Olympic spirit, but it seems the only way to keep the games viable. As Boston’s reluctance shows, the current system is broken. A change is gonna’ come.

It’s old news that the NCAA is, by definition, a cartel: a group formed to restrict wages by unilaterally dictating scholarship limits, thereby shriveling the economic freedom of their laborers. Athletic scholarships, by definition, pay athletes in-kind services and benefits (athletic training, room, board, education optional) in exchange for playing a varsity sport. Non-athletes don’t get athletic scholarships; it’s that simple. The pay-for-play debate is not whether athletes should be paid—they already are—but whether the NCAA has any legal grounds to arbitrarily cap that pay.

The NCAA’s argument to this point is truly impressive: they get to decide what “payments” are, and they have decided that scholarships are not payments. How convenient! Imagine if anyone could say the same to the IRS: the health care and company car I receive from my employer are not payments, so you don’t get to tax them. The end!

Beyond the “no-it-isn’t!” defense (so sophisticated that Monty Python did a sketch on it 40+ years ago), the NCAA is so refreshing because in addition to bringing plantations back from the 19th century, they are brazenly paternalistic. Paying for a college athlete’s family to attend his/her sporting match was for years a violation of the NCAA’s fabled “amateurism”, an infraction sure to draw a penalty if noticed. Until the NCAA just decided one day that providing for athletes’ families is a noble calling perfectly aligned with “amateurism”, so long as the NCAA does the providing, rather than empowering the athletes to do so.

This is an organization that cannot open its mouth without bragging about the $2.7 billion they give in scholarships, either ignoring or forgetting that without exploiting the athletes in the first place, the NCAA would not have a single cent to give to anyone. NCAA sports take in over $11 billion annually on the backs of college athletes. Then while distributing less than 25% back to those same athletes, they preach the virtues of fair play. Leon Festinger would be proud.

In truly bizarre fashion, this paternalism only extends to the athletes the NCAA claims to educate. Bill Gates and Mark Zuckerberg dropped out of Harvard to pursue non-academic opportunities and no one batted an eye. Natalie Portman starred in movies before attending college and could join the film club, skip class, and earn her worth in a free market. Yet (young, disproportionately black) athletes who may place sports above studying or dare to sell an autograph are naturally put in line by (old, disproportionately white) tyrants who claim to own them, or at least their name, image, and likeness. The heart of the plantation lives on.

Like this:

In the age of the internet, big screen televisions, and fourth generation smart phones, fan promotions have become more important as franchises strive to drive gate revenues. Pons, Giroux, and Mourali (2014) note that ticket sales still account for 32.6% of total revenues—the largest share of all receipts—despite the ever-increasing, live-access to a game from outside the arena. The Golden State Warriors use of a t-shirt design contest in tandem with their fan appreciation night increased their fans’ identity while segmenting their customer base and spurring future merchandise sales.

An event promotion or giveaway boosts the benefits of a live-event, simply because the physical good cannot be obtained via media coverage. In return, the Warriors likely increase and validate the identity of their fans by providing unique memorabilia, consequently raising their fans’ sensitivity to Warriors news and encouraging these fans to act on behalf of the organization. But the Warriors go further.

Funk and Lock (2014) state that “Sport identity occurs when an individual integrates a sports team into his or her sense of self, resulting in the team becoming an integral part of their self-definition” (p. 45). The Warriors sought out the input of their fans, asking for t-shirt design submissions, and rewarded the winner by sharing their design with thousands of Warriors fans. The event encouraged designers to market the Warriors indirectly, by lobbying their own networks of friends and family to share and vote for their design; of course these benefits came at virtually no cost to the Warriors. They engaged the sport identity of their fans in multiple ways. In the process, notes Sutton (2014), they reached 350-plus fans who cared enough to submit a design, while generating 150,000-plus Facebook impressions, 5,000-plus promotional URL views, and 450-plus mentions on Twitter and Instagram. This data can now be used to more precisely measure future fan involvement, and help the Warriors measure the return on their marketing investment.

Promotions have great power to segment fans. Though there is naturally some crossover, the crowd at Bollywood Night likely differs from St. Patrick’s Day, and Family Night hits a different demographic than Singles Night. The Warriors’ Fan Appreciation Night targeted existing fan-franchise relationships, acknowledging previous fan devotion and loyalty. Better yet, they stratified that group by identifying fans devoted enough to invest time and energy in submitting a design. Both groups—aspiring designers and fans who simply wanted a cool t-shirt—received special recognition from the Warriors.

This promotion also presumably increased consumer demand for Warriors merchandise. Pons, Giroux, and Mourali (2014) remark that “It is critical for sport marketers to understand what kind of fans attend their events and how to segment them, but it is equally important to understand how to market products to these consumers and tap the rationale they follow when deciding to purchase merchandise” (p.30). A fan who receives a limited-edition, official Warriors t-shirt for free is likely to associate positively with the experience, building one’s desire to try other Warriors gear in the future, in addition to returning to the Oracle to catch a game.

Like this:

Wins and losses are all that matter. Margin of victory isn’t important.

Hm. Hmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm.

Context

Emeryville Public Market. Lunch. Football. The San Francisco 49ers. It started when I expressed a nagging concern about losing to the Raiders in Week 14. Because you know, $*!% happens.

Why are you worried about the Raiders? They’ve lost 16 games in a row!

I know. That is a lot of games to lose. The Raiders are bad at football. I expect the 49ers to beat them; and given the respective current states of each team, I would expect these 49ers to beat these Raiders…90% of the time, or something. But half of the Raiders losses have been by 7 points or fewer; that means they are 0-5 in games decided by a touchdown (/one possession) or less. They lost 14-19 on the road to the Jets, 9-16 on the road to the Patriots, 28-31 at home to the Chargers, 24-30 on the road to Seattle, and 6-13 on the road to the Chargers this past weekend.

Does that matter?

In last year’s primer, I highlighted five teams that had particularly good records in close games in 2011: the Raiders (7-2 in close games in 2011), Packers (5-1), Saints (4-1), 49ers (6-2), and Steelers (5-2). In 2012, despite the presence of several star quarterbacks on their respective rosters, those same five teams went a combined 16-16-1 in games decided by one touchdown or less.

A team’s record in close games looks an awful lot like a random variable, and winning or losing a high percentage of close games in the past does not suggest that a team will continue that clip in the future. Rather, in close games teams tend to balance out around a .500 winning percentage. #regressiontothemean

Think about this conceptually. All else equal, would you rather play a team that had lost 10 games by 20 points each, or a team that had lost 10 games by 1 point each? Presumably the second team, with the much narrower margin of defeat, is a tougher opponent. Next, would you rather play a team that had lost 9 games by 20 points each and won 1 game by 1 point, or a team that had lost 10 games by 1 point each? The second team has the worse record; the first team has the worst point differential. All else equal, despite their worse record, the second team is still presumably a tougher opponent than the first team. This is because wins and losses are an imperfect measure of pure performance. Think about how these imaginary teams “performed”. The first team was dominated 9 times out of 10. The second team has been rather competitive with every opponent, only losing by one point. Context matters!

Wins and losses are all that matters. Margin of victory isn’t important.

Obviously, in a sense that is true. The teams with the most wins make the playoffs. But purely in terms of predicting how well a team will play (say, against the 49ers in Week 14), margin of victory matters a great deal. In fact, margin of victory is a better predictor of a team’s future chances than victory itself.

How can that be? Reducing a game purely to a win, a loss, or a tie for each team is not very useful. Not all wins are created equal.2 If Team A beats Team C by 1 point, and Team B beats Team C by 20 points, while Teams A and B are equal in wins, B certainly seems stronger than A. Turns out, there is a way to quantify such measures, aggregating across many games and years.

Pythagorean wins is an estimate of what a team’s expected record should be, based on their point differential. The formula is as follows:

I have gathered the wins, losses, ties, points for, and points against for all teams for each year from 2002-2013.3 The 2008 Detroit Lions went a historic 0-16. Yet their point differential (268 for, 517 against) maps to 2.8 Pythagorean wins. They may not have counted in the score book, but perhaps it is some comfort to Lions fans that their winless season was only the 8th worst in the sample, by Pythagorean standards. The 2007 New England Patriots, meanwhile, went an equally historic 16-0. Their point differential (589 for, 274 against) is in fact the very best of any team since 2002. Yet in 2007 they totaled 13.8 Pythagorean wins. To be sure, that is a lot4, but short of the 16 actual wins they achieved.

So what?

The whole point here is gauge a team’s likely future performance. What do you think is the better indicator of a team’s record next season: their actual record from the year before, or their Pythagorean record from the year before? (Hint: It’s the Pythagorean record. I didn’t write this for no reason.)

Oversimplifying5, a win in a given season amounts to .28 more wins in the next season; there is a positive correlation of 28%.6 And similarly, a loss in a given season amounts to .28 more losses in the next season. However, a Pythagorean win in a given season amounts to .38 more (actual) wins in the next season; there is a positive correlation of 38%. All else equal, Pythagorean wins say more about a team’s future than actual wins. Margins–of victory, and defeat–matter.

Graphs

I spent roughly 35 minutes looking for a clip of that quote from the end of Fight Club on YouTube. It’s not there. F@%^ you, YouTube. F@$% you. ↩

In addition to margin of victory, think location (home vs road vs neutral), strength of opponent, weather, etc. The others are important too, but they are not included here because #toomuchwork. ↩

Why 2002? That is the first year under the NFL’s current number of teams (32) and divisional alignment (8 divisions of 4 teams each). ↩

Like this:

This evening, the sportsfan takes a break from graduate school (and the first week of his new internship) to digest some career advice from the top, halfway around the world. (And also some Zachary’s Chicago Pizza. Not quite as good as Giordano’s, but it’ll do.)

Background: David Shoemaker is the chief executive officer for NBA China, headquartered in Beijing. He graciously agreed to speak with me this past Tuesday evening (PDT) about his career, for an informational interview I conducted in coordination with my studies per the sport management master’s program at the University of San Francisco and my own career goals. With his blessing, I am posting my thank-you letter here.

Dear Mr. Shoemaker,

Did you make a mistake today? I wouldn’t be surprised if you did, but I sure would be if you ever make it again. I have been thinking about my past mistakes since we spoke. Perhaps my biggest mistake has been to not make more of them. If I had sought more during my undergraduate education–more advice, more chances, more responsibility, more dreams–perhaps I would not have felt the need to spend more money on graduate school. That would be a most terrible mistake to repeat.

Though we seldom spoke directly of it, I felt our conversation revolved around pace. Coming to better understand your pace, both daily and through your career, was a privilege. We also discussed the pace of business: ideas, opportunities, and risks that slow and speed one’s working environment. There is the unprecedented pace of the NBA’s new 365-day approach to marketing. The pace of national, institutional, and individual progression. Even the pace of conversation. Timing is everything. I briefly brought up John Wooden; one thing he said is that there are no big things, only little things, little details. Being on-time, every time. Not pushing yourself a lot more, but a little more every day. Of course the difference between reading words in a book (even one by John Wooden, or Steve Jobs, for that matter) and hearing the voice of a current working executive is paramount.

Actions speak louder than words, and in a conversation one can only make so much noise. But as I progress through my schooling and career beginnings, I will keep your shared wisdom ringing in my ears, or at the very least remember to go swimming, not golfing. Even if I’m not surrounded by Ivy League lawyers, I’ve got to keep busy proving myself, at the moment as an intern, graduate student, and seeker of advice from other leaders in the sports industry. Still, from time to time I’ll keep an eye on the Weibos, RenRen, and other happenings in the second most important NBA market in the world. I can see the recurring blog feature now: “Holy Yao! The Latest in NBA China’s Development”.